The Big Problem of Small Change

Thomas J. Sargent

Publication Year: 2014

The Big Problem of Small Change offers the first credible and analytically sound explanation of how a problem that dogged monetary authorities for hundreds of years was finally solved. Two leading economists, Thomas Sargent and François Velde, examine the evolution of Western European economies through the lens of one of the classic problems of monetary history--the recurring scarcity and depreciation of small change. Through penetrating and clearly worded analysis, they tell the story of how monetary technologies, doctrines, and practices evolved from 1300 to 1850; of how the "standard formula" was devised to address an age-old dilemma without causing inflation.

One big problem had long plagued commodity money (that is, money literally worth its weight in gold): governments were hard-pressed to provide a steady supply of small change because of its high costs of production. The ensuing shortages hampered trade and, paradoxically, resulted in inflation and depreciation of small change. After centuries of technological progress that limited counterfeiting, in the nineteenth century governments replaced the small change in use until then with fiat money (money not literally equal to the value claimed for it)--ensuring a secure flow of small change. But this was not all. By solving this problem, suggest Sargent and Velde, modern European states laid the intellectual and practical basis for the diverse forms of money that make the world go round today.

This keenly argued, richly imaginative, and attractively illustrated study presents a comprehensive history and theory of small change. The authors skillfully convey the intuition that underlies their rigorous analysis. All those intrigued by monetary history will recognize this book for the standard that it is.

Cover

Title Page, Copyright

Contents

List of Illustrations

List of Tables

Preface

This book describes our efforts to discover the origins of a principle
that central banks now routinely use to manage a country’s supplies
of coins and notes. Because that principle cured what had been
widespread and enduring problems of monetary management, our...

Acknowledgments

Part I: A Problem and Its Cure

1. Introduction

A century ago few would have foretold the kind of money we use today. In 1873, the U.S. Congress had passed a law, section 14
of which states: “the gold coins of the U.S. shall be a one-dollar
piece, which, at the standard weight of 25.8 grains, shall be the...

2. A Theory

This chapter presents the main elements and outcomes of our model.
The exposition here contains enough to reveal the features that we
watched in history. A complete account of the model appears in
part V...

3. Our Philosophy of History

Subsequent chapters contain selective histories of thoughts and
events that pertain to managing the coinage. We present only a sample
from a vast record of thoughts and events. Our model helped us
select it, so our sample is biased. Because we are prejudiced observers...

Part II: Ideas and Technologies

4. Technology

Our model identifies economically significant features of the technology
of coin production, including ones that govern the costs
of entering the business of producing counterfeits. This chapter is
about technologies for producing coins. We describe the constituent...

5. Medieval Ideas about Coins and Money

Implementing the standard formula required both a theory of convertible tokens and a technology for producing counterfeit-proof
small denomination coins. Having described the history of the
relevant technology, we now recount theoretical developments that...

6. Monetary Theory in the Renaissance

Renaissance writers dismantled Renaissance the medieval “communis opinio” that ideally coins should be valued according to their intrinsic metallic content. They discovered three important and enduring ideas
in monetary theory that undermined the “communis opinio...

Part III: Endemic Shortages and “Natural Experiments”

7. Clues

In parts III and IV, we read history in the light of our model. Part III
describes events before and part IV events after the technological and
theoretical innovations of the Renaissance.
In part III, we document the recurrent shortages and debasements...

8. Medieval Coin Shortages

Complaints of coin shortages abound in the record since the Middle Ages.1 The complaints were sometimes general and vague. When they were specific enough, they often mentioned a lack of coins of
small denomination. Other concurrent phenomena were sometimes...

9. Medieval Florence

This chapter describes the circumstances surrounding the early coins
of pre-Renaissance Florence and other Tuscan towns. After they issued
multiple denominations, Tuscan towns encountered flaws in
the theoretically self-regulating commodity money system, with its...

10. Medieval Venice

Venice originally used one coin, the penny of Verona. Then starting
around 1182, it minted its own penny or denaro, a silver coin about
25% fine.1 In 1201, so the story goes, Venice had exacted ten tons
of silver from the leaders of the Fourth Crusade to ferry them to the...

11. The Price Revolution in France

The “Price Revolution” was a European-wide inflation during the
sixteenth and early seventeenth centuries. A century of shortages
and depreciations of small coins led the French authorities in 1577
to entertain issuing token small coins as a possible cure for shortages...

12. Token and Siege Monies

Medieval jurists’ preference for full-bodied coinage discouraged but
did not entirely stop various forms of tokens or redeemable promises
from circulating as currency. Occasionally, siege and other token
coins were temporarily issued to relieve extraordinary shortages of...

Part IV: Cures and Side-effects

13. The Age of Copper

Chapter 4 described a substantial technological change that occurred
around 1550, making coins more immune to counterfeiting. As the
innovation diffused across Europe, governments sought to dissociate
the metallic currency from its intrinsic content, a possibility already...

14. Inflation in Spain

The standard formula recommends that the government make over-valued tokens that it redeems for full-bodied coins. To create tokens,
the government should terminate free minting of small denominations
and thereby end the associated automatic mechanism governed...

15. Copycat Inflations in Seventeenth-Century Europe

This chapter describes how several European countries were tempted
to replicate the Castilian experiment with token coins. Some resisted
but others accepted the temptation and took the inflationary consequences...

16. England Stumbles toward the Solution

This chapter and the next describe the mixture of experience and theorizing that eventually led England to adopt the standard formula.
Experience held the upper hand. During the seventeenth
and eighteenth centuries, England used privately issued tokens and...

17. Britain, the Gold Standard, and the Standard Formula

With the Great Recoinage of 1696, Britain withdrew from its earlier experiments with token subsidiary coins and reaffirmed the medieval
idea of a full-bodied commodity money throughout the denomination
structure. It thereby arrested its earlier substantial progress...

18. The Triumph of the Standard Formula

This chapter describes how the standard formula spread beyond
Britain in the course of the nineteenth century. While Britain
adopted the standard formula along with the gold standard, in 1838
the German Monetary Union implemented the standard formula...

19. Ideas, Policies, and Outcomes

James Laurence Laughlin (1931, 87) concluded his textbook exposition
of the standard formula as follows:
It might seem at first blush that, as subsidiary moneys play only
a secondary part, the principles governing them are not of first...

Part V: A Formal Theory

20. A Theory of Full-Bodied Small Change

We present a model of supply and demand for large and small metal
coins designed to simulate the medieval and early modern monetary
system, and to show how its supply mechanism lay vulnerable to
alternating shortages and surpluses of small coins.1 We extend Sargent...

21. The Model

In a small country there lives an immortal representative household
that gets utility from two nonstorable consumption goods.
The household faces cash-in-advance constraints.1 “Cash” consists
of a large and a small denomination coin, each produced by...

22. Shortages: Causes and Symptoms

This chapter computes some sample equilibria and uses them to
highlight key operating characteristics of the model. We utilize
the back-solving strategy employed by Sargent and Smith (1997)
to describe possible equilibrium outcomes. Back-solving takes a...

23. Arrangements to Eliminate Coin Shortages

This chapter describes two money supply mechanisms that, within
the context of our model, prevent shortages of small coins. We
scrutinize these mechanisms in terms of how they incorporate some
or all of the ingredients in Cipolla’s recipe, and study whether some...

24. Our Model and Our History

We designed our model to help us understand problems with the arrangements
for minting more or less full-bodied coins that prevailed
for centuries throughout western Europe. Our model ascribes rules
for operating the mint that copy historical ones, and focuses on the...

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